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Democracy and economic growth are incompatible in Pakistan….

Pakistan’s economy has experienced decades of boom and bust in a set pattern. If we divide Pakistan’s political history into periods of military rule and democratic rule, we clearly see that the country invariably enjoyed economic boom during the so-called military regimes. The bust pattern invariably pertains to the period when Pakistan was ruled by democratic forces. Does this mean that military rulers were better economic managers than the civilians? Not necessarily. The economy, even during the military rule was run by civilian economists. But one fact is very clear; the military rulers appointed the best and internationally acknowledged economic wizards to manage the economy. Pakistan was an economic giant, a model cherished and followed by those who are now Asian Tigers.

Business Recorder, in its recent issue has published an interesting analysis. According to this piece, Pakistan has faced varying economic growth since its inception. Growth has been slow during the civilian rules; while three long periods of military rule have seen remarkable recovery. Despite being a very poor country in 1947, the growth rate has been better than the global average during the subsequent five decades, but slowed a bit in the late 1990s. However, Pakistan’s economy gained its momentum again and grew at an average rate of 7 percent between 2003 and 2007 which enables the government to rise development spending. As a result, the poverty headcount was reduced by more than 10 percent from 34.5 percent in 2001 to 22.3 percent in 2006.

Since the beginning of 2008, Pakistan’s economic outlook has taken stagnation. Although Pakistan joined the War on Terror in 2001, it is argued that security concerns stemming from the nation’s role in this war have created great instability and led to a decline in FDI from a height of approximately US $5410.2 Million in 2008 to US $2205.7 Million for the fiscal year 2010. Concurrently, the insurgency has forced massive capital flight from Pakistan to the Gulf. Combined with high global commodity prices, the dual impact has shocked Pakistan’s economy, with gaping trade deficits, high inflation.

Is it really the War on Terror which is responsible for this economic scenario? Very unlikely, because Pakistan’s economy grew at phenomenal pace when Pakistan was in the thick of the battle. The first drone strike hit Pakistan’s tribal belt in 2004. FDIs have a system of seeking an investment haven and these normally go to the destination where these feel safe irrespective of the security situation. Foreign investors need to be assured of the security of investment, not the security situation. An investment will land in a place where economic management is reliable and economic atmosphere is corruption-free. Is it not a fact that foreign capital has no faith in the political acumen of political leaders and had started flying out the moment it was clear in 2007 that military leadership was on its way-out? The foreign capital felt similarly insecure when the democracy was ushered into Pakistan in early 70s.

The analysis rightly highlights that inflation reached as high as 21 percent in 2008 and Pakistan had to depend on an aggressive fiscal policy backed by the International Monetary Fund to avoid possible bankruptcy. The inflation rate for the fiscal year 2011 was 14.1 percent. The average inflation rate between 2007 and 2011 stood at 14.6 percent whereas food inflation in the same period was 18 percent. It is feared that gains in the poverty reduction during mid-2000’s may have eroded by this high rate of food inflation. The rise in inflation rate may also have an adverse effect on labor productivity as well as on total factor productivity.

The GDP growth indicates that Pakistan has experienced high economic growth in 1961-65 (7%), 1966-70 (6.5%) and 1981-85 (6.46%). However, the GDP growth was low in early 1970s (4.22) and between 1996-00 (3.89%). The GDP growth rate became 4.87% during 2001-05 and slowed down to 4.14 during 2006-10. The average growth rate of GDP between 1961 and 2010 was 5.21%. The GDP growth rate was 2.4 percent during the fiscal year 2011. The main driver of the Pakistan economic growth is the capital accumulation. During 1961-65 the contribution of capital was 5.15 (73%) as compared to the contribution of labor which was 1.68 (24%). The contribution of capital was lowest between 1996-00 and stood at 2.56 (66%) against the contribution of labor 1.13 (29%).The contribution of capital was lowest between 1996-00 and stood at 3.94 (76%) against the contribution of labor 1.32 (25%).

The periods of high growth rate pertain to rather stable periods of military rule. During these periods of economic boom, Pakistan was not dependent on multilateral donors for its balance of payment support. The debt portfolio was manageable and inflation was under control. The industrial and physical infrastructure developed in the 60s is still the backbone of Pakistan’s economy. The first democratic government of Mr Bhutto appointed an engineer to manage the economy. Nationalization of small and large industrial units for political reasons was the first step to destroy the foundations of Pakistan’s economic stability. The subsequent democratic governments did not appoint any economist, again for political reasons, to manage the economy. The only technocrat that one government could find for its Finance Ministry was a chartered accountant. Chartered accountants may be good at creative accounting but national economy is not their cup of tea.

The major reason for collapse of economy in a civilian rule is the political expedience. The political interests of politicians are always incompatible with national economic interests. The country is run on the principle of appeasement in order to secure a constituency for the next elections. Cronyism is the root cause of every ill in a democratic set-up where the principles of governance are sacrificed for personal reasons. This is a sure recipe for economic disaster where the ultimate sufferers are the people. Untargeted subsidies, packing of state corporations with undeserving cronies and their voters, bleeding of economy to keep afloat the loss making corporations mis-managed by friends and allies are the corrupt practices which can only flourish during a civilian rule. To top it all, trading in government favors and paying for thefts out of the government exchequer are the hall mark of this democracy which itself is based on personal considerations and promotion of family interests at the cost of the poor.

3 thoughts on “Democracy and economic growth are incompatible in Pakistan….”

Keeping up democracy is the way to go. Democracy is dynamic that can steer Pakistan on way of progress and prosperity. Since last 65 years we have been playing havoc and made Pakistan a laboratory, where every day a new experiment is conducted, but no more now, we need only a strong democracy and nothing else. Corruption is always there and it is not unique to Pakistan alone. At least the electoral process gives people a chance to oust people from power. It is a process similar to sifting. It takes many years to mature. Pakistan’s military was propped up and strengthened by the cold war powers. Now the same powers are finding themselves in the opposite camp. In this scenario, Pakistan’s military does not have much muscle power to thrust its way through, like it did before. It managed to control the nation by pushing itself to the fore front of super power battles. Now that need is lost. Therefore Pakistan’s democracy has the best chance to grow and thrive. Mullahs and their political attempts have never succeeded in Pakistan. The voters have always rejected their overtures. Just keep at it. It will help the military go back to the barracks and submit to the civilian authority. And it will help come out of the unnecessary paranoia about neighbors.